HMRC has recently issued updated guidance outlining how salary sacrifice arrangements will work with automatic enrolment. It allays initial concerns over how the statutory opt-out provisions would sit alongside the principle that employees should not revert to their original salary under a salary sacrifice arrangement within a set period (typically 12 months) unless there is a lifestyle change.

Guidance
It’s clear that employers can continue to operate salary sacrifice arrangements when paying employees’ pension contributions following the introduction of automatic enrolment (although they should ensure employees’ contractual terms and conditions have been varied to reduce the employee's cash earnings for the salary sacrifice arrangement). This is good news for employers who wish to use the tax savings from salary sacrifice to offset some of the additional costs associated with the new scheme. However, employers should be careful over how and when any salary sacrifice arrangements are implemented.

Opt-outs
HMRC has said that where employees subsequently opt out of the pension scheme, or decide to stop paying into it, the salary sacrifice arrangement may be revised; in which case the employee’s remuneration terms and conditions will need to be varied once again. Crucially, HMRC has confirmed that a pension salary sacrifice arrangement can still operate effectively from a tax perspective, even where the employee can opt out of the pension scheme and bring the salary sacrifice arrangement to an end at any time (including where this is within the first 12 months).

Where employees exercise their right to opt-out within the statutory period, so they don’t become a member of the pension scheme, the employer can make good any sacrificed salary. Such payments would then be subject to income tax deductions and national insurance contributions.

Warning
HMRC’s guidance provides helpful answers to a number of key questions employers have been asking about how salary sacrifice would work with automatic enrolment. However, employers still need to be careful how they implement a salary sacrifice arrangement and ensure it is structured to achieve the tax efficiencies intended and satisfies the other provisions of the automatic enrolment regime. For example, employers cannot make becoming, or remaining, an active member of an automatic enrolment scheme conditional on a worker entering into a salary sacrifice arrangement. And employers need to decide whether to implement salary sacrifice at the same time as automatic enrolment or whether to offer salary sacrifice at a later date, perhaps after a worker’s statutory opt-out period has expired.


Teresa Dolan is an employment partner at Eversheds LLP